The Ethical Framework: Circular 230

Who Is Covered and Why It Matters

Treasury Department Circular 230 (31 C.F.R. Part 10) governs every individual who practices before the Internal Revenue Service. This is not a suggestion. It is federal regulation with the force of law, and its reach extends further than many practitioners realize.

Circular 230 covers attorneys, certified public accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and registered tax return preparers. It also covers any individual who, for compensation, prepares or assists in preparing all or substantially all of a tax return or claim for refund. If you are reading this course, you are subject to Circular 230. There is no opt-out.

The Office of Professional Responsibility (OPR) is the enforcement arm. OPR investigates allegations of practitioner misconduct, conducts disciplinary proceedings, and imposes sanctions. Between 2019 and 2024, OPR imposed sanctions in over 200 cases annually, ranging from private reprimands to permanent disbarment from practice before the IRS. The trend line has been upward. OPR's budget and staffing have grown, and the office has signaled that enforcement will continue to intensify.

Core Duties Under Circular 230

Section 10.22 -- Diligence as to Accuracy. A practitioner must exercise due diligence in preparing, approving, and filing tax returns, documents, affidavits, and other papers relating to IRS matters. Due diligence means more than avoiding obvious errors. It means making reasonable inquiries when information provided by a client appears incorrect, incomplete, or inconsistent. You cannot simply transcribe what a client tells you and call it a day.

Section 10.33 -- Best Practices for Tax Advisors. While framed as aspirational rather than mandatory, Section 10.33 establishes the professional standard that OPR uses to evaluate conduct. Best practices include communicating clearly with clients about the terms of the engagement, establishing the relevant facts, advising the client regarding the import of conclusions reached, and acting fairly and with integrity in practice before the IRS.

Section 10.34 -- Standards for Tax Returns and Documents. A practitioner may not sign a return or advise a client to take a position on a return unless the practitioner has determined that the position has a reasonable basis. For undisclosed positions, the standard is "reasonable basis" -- approximately a 20% chance of being sustained on the merits. For disclosed positions, the standard is "reasonable basis" with adequate disclosure on Form 8275 or 8275-R. For tax shelters and reportable transactions, the standard is "more likely than not" -- greater than 50% probability of being sustained.

Section 10.35 -- Competence. A practitioner must possess the necessary competence to engage in practice before the IRS. Competence requires the knowledge, skill, thoroughness, and preparation necessary for the matter at hand. Taking on an engagement you are not competent to handle is itself an ethical violation, regardless of whether the resulting work product contains errors.

Section 10.37 -- Requirements for Written Advice. When providing written tax advice, a practitioner must base the advice on reasonable factual and legal assumptions, reasonably consider all relevant facts the practitioner knows or reasonably should know, and use reasonable efforts to identify and ascertain relevant facts. Written advice must not rely on unreasonable factual assumptions, unreasonably rely on representations of the taxpayer, or take into account the possibility that a return will not be audited.

Penalties and Sanctions

OPR has a graduated sanction regime. The available sanctions, in ascending order of severity, are:

• Censure (Section 10.60): A public reprimand. The practitioner's name appears in the Internal Revenue Bulletin. This is a permanent mark on a professional record.
• Suspension (Section 10.60): Temporary loss of the right to practice before the IRS. Suspension periods typically range from six months to five years.
• Disbarment (Section 10.60): Permanent revocation of the right to practice before the IRS. A disbarred practitioner may petition for reinstatement after five years, but reinstatement is discretionary and rarely granted on the first attempt.
• Monetary Penalties (Section 10.50): Civil penalties up to $5,000 per violation for individuals and $50,000 per violation for firms. These penalties are in addition to any IRC penalty assessments.

Importantly, OPR sanctions are independent of any criminal prosecution or state licensing action. A practitioner can face OPR discipline, state bar or board of accountancy action, and criminal charges simultaneously for the same conduct. The standards of proof differ -- OPR uses a preponderance of the evidence standard, lower than the criminal standard of beyond a reasonable doubt.

Recent Enforcement Trends

OPR has increasingly focused on three areas in recent enforcement cycles. First, practitioners who fail to exercise diligence in verifying client-provided information, particularly for refundable credits such as the Earned Income Tax Credit and the Child Tax Credit. Second, practitioners who engage in "check the box" continuing education without genuinely maintaining competence. Third, practitioners who fail to respond to OPR inquiries -- itself a violation under Section 10.25 that can independently support disciplinary action.

The IRS Return Preparer Office also works alongside OPR, focusing on the broader population of return preparers, including those not subject to Circular 230's full scope. The two offices share referrals, and conduct flagged by the Return Preparer Office frequently results in OPR proceedings.

The Intersection with State Licensing

Circular 230 does not preempt state licensing requirements. CPAs are regulated by state boards of accountancy, attorneys by state bar associations, and enrolled agents hold a federal credential issued by the IRS. A single act of misconduct can trigger parallel proceedings in multiple jurisdictions.

State boards often impose their own ethical standards that may be more restrictive than Circular 230. For example, several state boards of accountancy require practitioners to report known client fraud to the appropriate authority under certain circumstances -- a duty that goes beyond Circular 230's requirement to advise the client. A practitioner must know the rules of every jurisdiction in which they practice, not just the federal standard.

The practical consequence is that a Circular 230 violation rarely exists in isolation. A censure from OPR may trigger a separate investigation by your state board. A malpractice claim may cite both Circular 230 and state ethical rules as the standard of care. Multi-jurisdictional exposure means that a single misstep can cascade across your entire professional standing.